Tenaris S.A. (TEN) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Second Quarter Tenaris S.A. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Giovanni Sardagna, Investor Relations Officer. Please go ahead.

Thank you, Carmen, and welcome to Tenaris 2026 Second Quarter Conference Call. Before we start, I would like to remind you that we will be discussing forward-looking information in the call and that our actual results may vary from those expressed or implied during this call. With me on the call today are Gabriel Podskubka, our Chief Executive Officer; Carlos Gomez Alzaga, our Chief Financial Officer; and Guillermo Moreno, President of our U.S. Operations. Before passing over the call to Gabriel for his opening remarks, I would like to briefly comment our quarterly results. Our second quarter sales reached $3 billion, down 4% year-on-year and sequentially, mainly reflecting the postponement of shipments to customers in the Middle East due to the effective closure of the Strait of Hormuz for most of the quarter. Average selling prices in our Tube operating segment were basically flat compared to the corresponding quarter of last year and sequentially. Our quarterly EBITDA decreased 12% sequentially to $649 million, while our net income decreased 13% to $492 million, mainly due to lower absorption of fixed costs in addition to higher raw material and logistic costs. With operating cash flow of $518 million and capital expenditure of $121 million, our free cash flow for the quarter was $396 million. Following a dividend payment of $606 million in the quarter, our net cash position at the end of the quarter decreased to $3.6 billion. The Board of Directors approved the payment of an interim dividend of $0.59 per share or $1.18 per ADS approximately $600 million that will be paid the 25th of November. Now I will ask Gabriel to say a few words before we open the call to questions.

Thank you, Giovanni, and I would like to extend a warm welcome to all of you participating in our call today. Our second quarter results clearly reflect the impact of the Middle East conflict and disruption in the Strait of Hormuz. As well as the consequent impact of logistics and energy cost increases. Even so, they also demonstrate the resilience of our performance based on the strength of our global positioning and the efficiency of our industrial operations. In the Middle East, shipments to Iraq, Kuwait and Qatar have been postponed as our customers were forced to reduce their operations and ships are unable to enter the Gulf. This situation will continue until the Hormuz Strait reopens. In Saudi Arabia and the Emirates, however, we were able to continue supply of OCTG to Aramco and ADNOC who have maintained their drilling operations fairly intact. In other regions of the world, customers are advancing investments to meet the need for energy security and diversification of supply. Drilling activity in unconventional plays is increasing in the United States, in Canada and also in Argentina. In the United States, we are adding work shifts at our industrial facilities. Our Bay City mill is producing at record levels, and we continue to invest to improve the production capabilities of our Koppel steel shop and our Ambridge seamless pipe mill. We are also extensively deploying a new high-torque wedge connection, which we developed for longer laterals. In Canada, we have launched a major $230 million investment program to increase the effective production capacity of our mill in Sault Ste. Marie. These investments will strengthen our domestic supply capabilities for our Canadian customers. In Argentina, 9 high-spec rigs have been added in Vaca Muerta since the beginning of the year, bringing the total to 42 in operation today. In addition, YPF, together with Eni and XRG are advancing investment plans for the $30 billion Argentina LNG project for which an FID is expected at the end of this year. We commented last time on the favorable outlook for long-cycle deepwater projects. With technology advances and short-term development schedules, these projects have become more cost competitive and are well suited to support security and diversification of supply. Several FIDs were taken over the last 3 months. An example is the Cronos project sanctioned by Eni and TotalEnergies, which will take deepwater gas from Cyprus to an LNG facility in Egypt. Tenaris has been supporting Eni in the definition and the supply of the pipeline requirements and also on the OCTG needed for the 4 wells of the project. We inaugurated our new service center in Suriname together with TotalEnergies and government officials. From this base, we managed the OCTG supply chain for the GranMorgu project. We also began deliveries of line pipe and coating for the Sakarya project in the Black Sea. Our backlog of offshore projects has increased, and we expect this to be reflected in our sales from the fourth quarter and into 2027. This year, our raw material costs have increased and are impacting our results progressively. We are also increasing prices. And in the fourth quarter, we should see this positive effect in our sales and margins. As we all adapt to a world of increased volatility and supply chain disruption, Tenaris is uniquely positioned to meet the diverse needs of its customers around the world with its global reach, differentiated service and technology and investments to strengthen its industrial system. With this, we open the floor for questions.

[Operator Instructions] Our first question is from Arun Jayaram with JPMorgan Securities.

I was wondering, Gabriel, if you could review the Board's decision and move on the dividend. It looks like you're effectively doubling the dividend rate and perhaps shifting a little bit away from the previous cash return strategy that included a mix of buybacks and still a strong dividend previously. But wondered if you could maybe talk a little bit about that move on the dividend? And do you view this as sustainable over the long term?

Yes. Thank you, Arun. And thank you for your question on this point. As you mentioned, the Board has decided to increase the interim dividend to $600 million, doubling, as you mentioned, given the strong balance sheet and sustained cash generation of the company. As you mentioned, the Board has favored distribution through dividends given the simplicity and also as a means of preserving the liquidity of the company's shares. So that's the rationale for the decision. And in terms of sustainability going forward, I believe that we can say that the Board remains committed to maintaining a level of shareholder returns that are broadly in line with the past levels. And at the same time, wishes to maintain financial flexibility in an environment of uncertainty, but that can also offer growth opportunities. Regarding sustainability and future, I would say at this time that this will be decided by the Board and subject to the approval of a shareholder annual meeting. But that said, and based on past practice and our track record and our strong balance sheet, this could be a continuation in the amount of the dividend and the proposal for payment in May as well.

Great. And my follow-up, and we do appreciate just the uncertainty and the disruption caused by the Middle East conflict on your business there. Gabriel, could you maybe give us a little bit more detail on what your assumptions assume for the second half of '26 in terms of that disruption? And perhaps maybe if we separate that impact, talk a little bit about how the underlying business is doing because it sounds like you are expecting a nice improvement or inflection as we think about the fourth quarter in terms of your base business, again, excluding some of the noise associated with the Strait of Hormuz.

Sure, Arun. I think it's an important point on the assumption of the Strait of Hormuz reopening or not. This is an important premise, and we have changed the premise that we had last quarter in which we believe or at least the base case scenario for our guideline was given with a short resolution of Hormuz opening. Today, and given the uncertainty that we suffered the last few months, we are changing -- not the outlook, but we're changing the premise on which we give our guidance for the second semester of the year. And what we are considering that the opening of the Strait of Hormuz in the short term will be an upside to our scenario, okay? Last quarter, we mentioned that we have about a business of $100 million of material that is going to the upper part of the Gulf, the one that is compromised due to the inability to -- for ships to transit through Hormuz. Which is Iraq, Kuwait and Qatar. We have even enlarged this backlog. Today, this figure would be $130 million. And this is the material that we have for that part of the Middle East that today is out of our forecast. If at any point in time, the conflict gets resolved or navigability in the Strait is restored, it will take us 70 to 90 days to ship this material from our mills and invoice it in the upper part of the Gulf. This is an upside that we will have when and if this happens, and this will be a recurrent upside in our forecast. But for now, we have taken this out of our base case scenario. Having said that, if we talk about the outlook, the guidance that we have given is that -- in the second half of 2026, we expect revenues and EBITDA in line with the first half with clearly a third quarter that is more affected and more in line with the second quarter. And as you are anticipating an uptick and an interesting jump in the fourth quarter that it will reflect all the other things that are happening in the world because the higher price of oil that is driven by the Hormuz disruption is creating the conditions in the U.S., in Canada, in Argentina and also the strength of the offshore market to start showing, and this has taken some time for these rigs to be added and for our mills to be ramped up, and we will see an important jump of volume and to some extent, some pricing as well in the fourth quarter of the year. So this in a nutshell gives a description of the outlook with an important clarification on the premise on the upper part of Hormuz because, as you know, UAE and Saudi, the lower part of Hormuz, despite the difficulties, they have been able to continue the drilling activity, and we have been able to continue shipping with additional logistics and effort, but this part has been less affected, I would say. Hopefully, this clarifies your point, Arun?

Yes, sir.

Our next question comes from Marc Bianchi with TD Cowen.

I'd like to follow up on that progression into the fourth quarter here. And maybe, Gabriel, you could help us maybe translate this backlog opportunity of $100 million plus that's being compromised. On a quarterly basis, if we were to sort of remove the effect of the Strait being impassable, I think if I work the math out, your fourth quarter EBITDA should be looking like your first quarter EBITDA in that $730 million range. If none of the stuff with the Strait were happening and you had a normal level of activity in the northern part of the Gulf, what would that look like?

I think you're having a very fair assumption on what the fourth quarter from what we're seeing and with all the uncertainty that we are managing. But without this northern part of the Gulf, our projection for the fourth quarter will be pretty much in line with the first quarter that you're indicating. And if you -- if this conflict of Hormuz will assure a navigability in the short term, during the next few weeks, we will be able to ship and invoice this additional $130 million within the fourth quarter. It still -- it's an upside, still a possible upside. And this will clearly increase. And you would assume that the margin on the material that we are selling in Iraq, in Kuwait in Qatar is premium material special grade. So it has a good average margin compared to the rest of the portfolio of Tenaris. So it will be a nice upside addition that will happen in the fourth quarter or thereafter. We would need 90 days for this to materialize.

Yes. Okay. That's very helpful. And then just following back up on the capital return. You made the comment about a similar level of capital return to the prior periods with this new program. And just to clarify on that. So typically, what Tenaris has done is pay an interim dividend that's about 1/3 of the total dividend. And then in May, we get a dividend that's the remaining 2/3. I mean I know it's ultimately a Board decision, but is that sort of the message that you're looking to deliver here?

Yes, Marc. This is exactly. It's not my decision. It's a Board decision. But based on past practice, this 1/3, 2/3 has been a bit the track record of the company also. This is what I was implying.

Our next question comes from Sebastian Erskine with Rothschild & Company Redburn.

Just to focus in on kind of North America and 2 parts to this. So North American sales were flat quarter-on-quarter. You've called out sort of U.S. OCG strength offsetting Canada and Mexico. And how much of that flat outcome reflects the fact that U.S. pricing is still lagging the Pipe Logix increases that we've seen? And maybe if you could give some color specifically on how you see that evolving in the second half of the year for North America in terms of price and volume? And then just a sort of bigger picture question on U.S. pricing. I mean, obviously, we started to see that the cycle turn. You're offsetting the step-up in hot-rolled coil prices. But at what level do you see imported OCTG coming back as a competitive threat again even net of the Section 232? So how much headroom basically is there before you begin to approach some level of parity with imports would be helpful to get your thoughts on that.

Thank you, Sebastian. I think on both questions related to U.S. activity and pricing, I will ask Guillermo to add more color, and maybe I will come back to the rest of North America, Canada and Mexico that complements our reporting group. But Guillermo on...